MGRECON401
Economics of International Business
and Multinationals
LECTURE 3
Multinationals and
Global Trade Agreements
5-2
Lecture Focus
What are the instruments and effects of
trade policy?
What is the history of trade agreements?
What are the implications of trade
agreements for multinationals?
5-3
The 7 Instruments of Trade Policy
Tariffs
Subsidies
Voluntary
Exports
Restraints
Import
Quotas
Local
Content
Requirements
Antidumping
Duties
Administrative
Policies
5-4
Tariffs
Specific
Fixed charge
per unit
Tariffs
 Oldest form of protection.
Ad Valorem
Charge is
a proportion of the
goods value
5-5
Tariffs
5-6
Tariffs and Florida OJ
Florida: 40
percent of the
World OJ market.
Brazil: 45 percent
of the World OJ
market. Brazil
controls World
market except the
US.
29.5 cent per
gallon tariff on
Brazilian OJ
concentrate.
5-7
Subsidies
Tax Breaks
Cash Grants
Government
payment to a
domestic producer
Government
Equity
Participation
Low Interest
Loans
5-8
Agricultural Subsidies
Very common in North America,
Europe and Japan
Keeps inefficient farmers in
business.
Encourages production of
products that can be grown
more cheaply elsewhere.
Reduces world trade.
Perpetuates global poverty.
5-9
Trends in Agricultural Development
5-10
EU Sugar Subsidies
Radical French Farmer Jose Bove
is Arrested by French Gendarmes
in the South Western Village of
Solomiac
5-11
EU Sugar Subsidies
5-12
US Cotton Subsidies –
Impact on Mali
5-13
Import Quotas and
Voluntary Export Restraints
Import Quotas
Quota
rent
VERs
Quota on trade imposed
by the exporting
country at the request
of the importing
country’s government.
Helps
producers
Direct restriction
on the quantity of a
good that can
be imported into
a country.
5-14
5-15
The MultiFibre Agreement
The MultiFibre Agreement (MFA) sets quotas
limiting the amount of imports of textiles and
clothing from “developing” to “developed”
countries.
Will be phased out during the ten year period
1995-2005.
Will have major implications for exports from
China and India.
Will also have major implications for countries,
such as Sri Lanka, Indonesia, and Mauritius,
who would not otherwise have developed a
textile industry.
5-16
Dumping & Antidumping Policies
Dumping = Selling goods into a
foreign market below
production costs, or selling
below “fair market value.”
Antidumping = policies
enacted to punish foreign
firms and protect local
industry from “unfair”
trading practices.
5-17
Domestic
Demand DDOM
Foreign
Demand DFOR
MR = PFOR
Profit Max at
QMONOPOLY
MC = PFOR
Domestic
Sales QDOM
Exports
QMONOPOLYQDOM
5-18
U.S. Vietnam Catfish Dispute
5-19
Development of the
World Trading System
Intellectual arguments for free trade:
Adam Smith and David Ricardo.
Free trade as government policy:
Britain’s (1846) repeal of the Corn Laws.
Britain continued free trade policy.
Fear of trade war.
5-20
World War I to World War II
1918 - 1939
Great Depression
US stock market collapse
Smoot-Hawley Act (1930)
US had positive trade
balance with world
Act imposes tariffs to
protect U.S. firms.
Foreign response was to
impose own barriers
US exports tumbled
5-21
General Agreement on
Tariffs and Trade (GATT)
WWII allies want international organization in
trade arena similar to UN in political arena.
GATT proposed by US in 1947.
19 original members grew to 120 nations by the
time it was superceded by the WTO.
GATT members agree not to raise tariffs above
negotiated rates.
5-22
Average Reduction in US Tariff Rates
1947 - 85
120
100
80
60
40
20
GATT Negotiating Rounds
yo
To
k
ed
y
en
n
K
ill
on
D
en
ev
a
G
ay
To
rq
u
nn
ec
y
A
en
ev
a
G
en
ev
a
0
Pr
eG
Index
Pre-Geneva
Tariff = 100
5-23
WTO
Created by Uruguay round of GATT.
141 members and 28 candidates.
Between 1995 and 2000, 213 disputes brought before
the WTO.
Significant victories:
Telecommunications
Financial Services
Intellectual Property Protection
5-24
Regional Trade Agreements
EU: Complete elimination of restrictions on goods flows,
capital flows, and labor flows within Europe.
NAFTA: Free trade among Canada, US, Mexico.
Andean Pact: Bolivia, Colombia, Ecuador, Peru, Venezuela.
Mercosur: Argentina, Brazil, Paraguay, Uruguay.
Free Trade Area of the Americas (FTAA): 34 nations
from Alaska to Argentina, planned start by 2005.
ASEAN: Brunei, Indonesia, Laos, Malaysia, the
Philippines, Myanmar, Singapore, Thailand and Vietnam.
APEC: US, Canada, Japan, China, many in S.E. Asia,
Australia.
African trade blocs: 9 different trade blocs.
5-25
5-26
ASEAN
5-27
5-28
5-29
5-30
Regional Economic Integration
and Firm Strategy
What does NAFTA (or EU, etc.) mean
for a firm’s strategy?
A larger market raises profits due to
economies of scale.
Larger profits encourages new entrants;
provides an incentive for firms to erect
entry barriers:
Introduce new variety
Expand capacity
5-31
Toyota Motor Manufacturing USA
•
•
•
•
•
What are the political motivations behind Toyota moving
production facilities from Japan to the US?
What are the economic motivations behind Toyota moving
production facilities from Japan to the US?
What is the source of Toyota’s comparative advantage in producing
automobiles?
Why is it so hard for another company to fully replicate the Toyota
Production System (TPS)?
In what sense was the creation of TPS a response to some primitive
characteristics of automobile production and to a perceived
weakness of U.S. automotive companies and addressing these
characteristics?